The Employees Trust Fund: Its

concept, misconceptions, and the way

forward

Tuesday, 29 November 2016

At a time when the Employees Trust Fund is celebrating 35 years
of existence, it is time to reflect upon its original concept and
perhaps look at any re-orientation needs it requires to be
compatible withthe current socio-economic environment.
The Employees Trust Fund (ETF) and its sister fund, the
Employees Provident Fund (EPF), have attracted considerable
attention in the recent past. Some concerns are justified while
others are unfounded and arise to ignorance. Most often
whenever these funds come up in conversations, it is surprising to
note the many misconceptions that abound. This article attempts
to provide some insights into the original concept and objectives
of the ETF, correct some of the misconceptions and finally suggest

a way forward to achieve desirable objectives.

The concept of an ETF

The open economy introduced in 1978 created a paradigm shift in
Government policy. The private sector was expected to be the
engine of growth, the Government was to be a facilitator of
economic growth, and a massive infrastructure programme was
initiated. It was in this environment that the Employees Trust
Fund was created. It is common knowledge that the ETF was the
brainchild of Lalith Athulathmudali, the then Minister of Trade and
Shipping who was instrumental in creating the Sri Lanka Ports
Authority by amalgamating three entities, and making the
Colombo Port an efficient and sought after port.
However there are two opinions on the exact motive for the
creation of the ETF. One belief is the publicly declared objective of
making every employee a stakeholder of the economy through
indirect ownership of shares in private enterprises. Since the EPF
was already an established superannuation fund invested

primarily in Government securities, and principally to benefit

employees on retirement, the ETF was to be a non-contributory
fund primarily to invest in industrial and commercial ventures and
earn a return from such investments for the benefit of members.
The alternativebelief was that the Government wished to create a
new fund which could be utilised to invest in large infrastructure
projects. The Government in its endeavour to create rapid
economic growth encountered difficulties in financing large
infrastructure projects. One such was the Dry Docks which was
considered essential for the development of the popularity of the
Colombo Port.
The story goes that being a brilliant strategist, Lalith
Athulathmudali, after a back of the envelope type calculation,
realised that taking a small sum equivalent to 3% of the salaries
and wages of all employees would amount to a substantial fund
which the Government could use and would bebeneficial to
employees as well.
The EPF which commenced in 1958 was turning out to be very
useful captive fund and growing fast. The EPF funds could not be
touched since it had restrictions on investing in commercial
ventures. A separate non-contributory fund (contribution by
employers only) would therefore be welcome by the working
population and also would not be subject to strong objections by
employers. This could be an answer to the investment deficit of
Colombo Dry Docks Ltd., which was to construct a large dry dock
and many other such projects. Some credence could be given to
this belief because a substantial amount of ETF funds were in fact
invested in the Colombo Drydocks which did not yield any return
until its privatisation in 1993.
Analysis of ETFs portfolio of equity investments in 1990 showed
that 51% was invested in Colombo Dockyard and Drydocks, 18 %
in Dankotuwa Porcelain and 7% in Lanka Milk Foods, amounting to

a massive 76% in three companies while all other equity

investments in several companies amounted to only 24%. In
addition a further Rs. 140 million was invested in Colombo
Drydocks Ltd. as debentures plus Rs. 27 million in Lanka Cement
debentures. One would not be wrong to assume that ETF was
being used to finance State-owned ventures which did not yield
the desired return. However one could argue that the investments
were within the provisions of the ETF Act and that these
investments did actually benefit the country.
By the way I need to clarify that there existed at that time the
Colombo Dockyard Ltd., a private company, and Colombo
Drydocks Ltd., a public listed company. Colombo Drydocks
Ltd.was only a shell and the management was handled by
Colombo Dockyard Ltd. Later on, after privatisation of Colombo
Drydocks Ltd., and the liquidation of Colombo Dockyard Ltd., and
since most foreign agents weremore familiar with the Colombo
Dockyard name, Drydocks changed its name to Colombo
Dockyard Ltd.
The Colombo Port which was in 139th position worldwide in 1980
in rankings of international container ports came upto 26th
position by 1988. ETF could be proud of its contribution in the
overall development of the industry, and if in fact the ETF was
created for investments in infrastructure as claimed by some it
justifies the intention.
The establishment of the ETF
A reference to the establishment of a proposed Employee Trust
Fund is seen in the White Paper on Employee Relations published
in January 1978. This speaks of a contribution of 6% of total
earnings of employees to be paid by the employer and credited to
individual accounts of the fund to be paid to employees as
Gratuity.
According to records available at the Employers Federation of

Ceylon (EFC), at a meeting held in June 1978 the Minister advised

members of trade chambers, associations and the federation that
the Government intends to introduce legislation to establish an
Employee Trust and Investment Fund. The EFC was co-opted to a
liaison committee to study and make recommendations on the
draft bill, once available. The suggested name at that time which
included Investment is significant and hints at the investment
objective of the fund.
As per the broad outline of the scheme announced by the Minister
at the meeting,
the employers, both in the private and public sectors
were required to contribute to the Fund
no industrial disputes were to be entertained in
relation to claims of gratuity for periods of service
covered by the contributions to the Fund and
the Fund was to be administered by the Minister of
Labour and its management to vest in a competent
body comprising of the public and private sector
officers.
The purpose of the Act was to ensure a gratuity to all
employeesand to enable the investment of monies in
the Fund for purposes beneficial to the employees
unlike in the case of EPF from which there is state
borrowing.
Based on this broad outline, the EFC made
representations to the Minister of Trade in July 1978,
stating inter alia that
the monies in the Fund should not be invested in such
a way to permit indirect nationalisation of private
sector establishments,

 investments should be made to construct houses for

employees,
adequate publicity should be given to the activities of
the Fund and
income accruing to the Fund from investment must be
exempt from income tax.
These representations were made on the assumption that
employers would not be called upon to bear any further financial
liability under any other scheme.At this time there was a
suggestion in relation to a pension scheme for the private sector
employees and a Gratuities Bill to provide for the payment of
gratuity for employees. EFC made it clear that there should not be
another burden on employers in addition to the liability under the
Trust and Investment Fund or other schemesthat seek to provide
for payment on account of services rendered by employees.
In August 1979 the press reported, quoting the Minister of Trade
and Shipping that a new Act setting up an Employees Investment
Fund will be presented in parliament before the end of the year.
This will provide for the distribution of profits among the workers
in the public, corporation and private sectors, the Minister had
stated. It was the opinion of the Minister that the economy of the
country should be equally distributed and enjoyed by everyone.
In January 1980 it was reported that the Employees Trust Fund
Act when enacted would require private sector employers to pay
an amount equivalent to 3% of the employees wages to a special
trust fund to provide retirement benefits to those employees. It
was further reported that the Sri Lankan scheme is different to
those in other countries such as Singaporesince the funds
invested on behalf of the employees would come out of their
employers pockets.Contrary to assurances given earlier, in
August 1980, just before the ETF Bill was taken up for debate in
Parliament, the Minister of Labour announced that a Gratuities Bill

would soon follow.

During the 2nd reading of the ETF Bill, Minister of Trade attributed
the 3% contribution to the Fund as an immediate salary increase
granted to the workers which would amount to a profitable saving
of theirs and that the Bill is not in lieu of the gratuity paid to
employees.
The Act was passed on 29October 1980 and has been in effect
since 1981.The Act, however, allowed those employers who had
voluntarily opted to pay to the EPF a higher contribution than the
mandatory 12%, to deduct such higher amount upto 3% and
make contributions to the ETF. The membership of the ETF was
higher than the EPF because even those who contributed to
private provident funds had to contribute to the ETF.

Objects of the ETF

Section 7 of the ETF Act 46 of 1980 lists the following as its
objects:
a)to promote employee ownership, employee welfare, economic
democracy through participation in financing and investment
b)to promote employee participation in management through the
acquisition of equity interest in enterprises
c)to provide for non-contributory benefit to employees on
retirement; and

d)to do all such other acts or things as may be necessary for, or

conducive to, the attainment of the objects specified in
paragraphs a, b and c of this section.
When the ETF Act was passed, some of the objects are reported to
have caused much concern in the private sector. Particularly the
item b was feared as it could be used by the Government in an
undesirable manner.Employee participation in management was
another cause of concern. Perhaps the Government was inspired
by the trends in Sweden and other countries where advanced
forms of worker participation existed from the early 1970s. In
Sweden workers representatives could become members of the
Board of Directors. The Sri Lanka Government, too, introduced
this system to Government Corporations in 1977 which didnt
quite register the expected benefits. By the time the ETF Act
became operational the concept of worker participation in
management was dying out. I need to clarify that even today
there are many forms of effective worker participation, but what I
have alluded to was worker representatives on boards of
directors.
The closest the ETF has come to having worker participation was
when a union representative was nominated to the Board of the
Dankotuwa Porcelain by the Minister of Labour under whom the
ETF functioned at that time. ETF by virtue of the fact that it had
50% ownership of Dankotuwa Porcelain was able to make that
nomination. This was not a successful decision.
I recommend that this dangerous object clause be removed, since
it is clear that the fears of the Employers Federation were
justified when later ETF acquired significant stakes in companies
which were being privatised, thus completely defeating the
objective of privatisation. In one instance the ETF acquired 90% of
the equity of a company being privatised.

By and large the objects for which the ETF was formed has been
achieved but it was in the early 1990s that a clear identification of
what ETF stands for and the difference between EPF and ETF was
made. This enabled many who argued that the ETF was a mere
duplication of EPF to realise the difference. The following table
indicates the clear demarcation and the objects in line with the
prevailing business and industrial relations climate at the time
without deviating from the objects specified in the Act. Perhaps it
is time to revisit this and re-define the objectives in line with
current requirements.
It was in line with this clear definition that more benefit schemes
were initiated by the ETF. The heart surgery scheme was a great
boon to workers who could not afford the surgery. There was
criticism that this scheme would not benefit the manual workers
in the mistaken widely held belief that only senior executives who
suffer from work stress succumb to heart problems. This was
debunked by many heart specialists and the evidence from the
claims too, prove that many manual and clerical workers
benefited from this scheme.
The disability scheme and the death benefit scheme as well as
the intra-ocular lens implant scheme were also based on
recommendations of medical professionals who knew of the
difficulties of the less affluent workers. When the ETF reflected on
the various schemes it realised that all the hitherto initiated
schemes were to assist negative situations and so decided that a
scheme for a positive event was desirable. This gave birth to the
Year 5 scholarship scheme which lightened the burden of
members whose children were star performers and gained
admission to better schools.
The Fund in safe hands
There is an unfounded fear among many uninformed members
that their savings are not actually available because the
Government has appropriated them. Even educated private sector

managers have expressed this fear. Often an explanation has

enlightened them but not everyone is convinced. More
communication is required to educate employees that their funds
are safe.If one looks at the latest portfolio as seen in the pie chart
there should be no doubt that the funds are safe.
A total of 91% is in Government securities, and only 5.6% is in
shares and unit trusts. This chart should allay any fears that

people
have regarding the security of their funds.
However, this certainly does not mean that the Board should be
callous in its equity investment policy. Every investment however
small must be transparent and justified. The investment in shares
is grossly insufficient and defeats the purpose for which this fund
was set up.
A separate study is required to determine whether the EPF and
ETF has at least provided a fair return at least equivalent to the
savings interest rate of the National Savings Bank.
The chart clearly shows that the EPF returns are more stable while
ETF returns are more volatile. The actual situation of ETF returns
may be even worse because the correct loss provisions for the
diminution of the market value of shares had not been made in
some years and the Auditor General had even pointed this out in
his report. ETF may not be able to match the EPF returns because

the ETF has medical, insurance, and scholarship benefits, the

costs of which are set off from the profits of the fund. Furthermore
the entire administrative cost of enforcement is set off against the
profits whereas in the case of EPF the enforcement activities
carried out by the Labour Department are provided by the Labour
Department budget.
The way forward: Some suggestions
1. The fish rots from the head, they say, meaning that a strong
and competent Board is a sine qua non for any institution. A major
lapse in the Act is that the Commissioner General of Labour is not
an ex-officio member of the Board. The provision to have a
nominee of the Minister in charge of the subject of Trade is no
longer relevant and should be replaced perhaps with a nominee of
the Central Bank of Sri Lanka. The four members nominated by
the Minister should include qualified and experienced
professionals in the fields of industry, commerce and banking.
During the tenure of the previous Government only one
representative of Trade Unions was appointed. This is not
desirable. It is also desirable to have the Chairman of the
Employers Federation of Ceylon (EFC) as an ex-officio member
rather than leaving it open for the EFC to decide on the nominee.
2.Governance could be improved by making the Board of
Directors more accountable. I suggest that the National Labour
Advisory Council has a quarterly agenda item where the
performance of the ETF and its investment decisions are subject
to discussion.
3.The objects of the Fund should be revised taking cognisance of
contemporary requirements. My suggested objects are as follows:
a.To promote economic growth and employee democracy
through participation in financing and investment

b.To provide for non-contributory medical, insurance and

financial benefits to employees during their working life
and on retirement
c.To promote employee welfare, occupational health and
safety
d.To promote industrial harmony and higher labour
productivity through the promotion of modern techniques
of employee involvement, and employee engagement.
e.To do all such other acts or things as may be necessary
for, or conducive to, the attainment of the objects
specified in paragraphs a, b, c and d of this section.
4.Section 9 should be repealed. It allows the Board to establish
and operate industrial and commercial enterprises, and secure
shares for employees in any undertaking to promote employee
participation in the management of such undertakings. The
investment policy should be precise and unambiguous. The focus
of the investment should only be confined to realising a fair return
at a marginal risk. The Fund should not take any strategic stake in
any enterprise and ideally should limit the holding of any
company to 10% of its issued capital. The Fund should not invest
directly in unlisted equities nor should it invest in start-ups. The
experience of the Fund in such start up investments has been
disastrous. If the Fund wishes to contribute to economic growth it
could invest in venture capital funds which have an abundance of
experience in evaluating projects suitable for support.
5.Many years ago the ETF carried out a safety campaign with TV
commercials. It later joined with CTC Eagle Ltd to promote a
National Safety Award with technical assistance provided by the
Factories Division of the Labour Department. I believe the ETF has
an obligation to promote occupational health and safety and

should actively support such programmes to elevate the health

and safety environment in workplace.
6.When the Katunayake Export Processing Zone was reaching its
peak in the early 1990s and there was a massive influx of workers
to the zone but with woeful accommodation conditions, and the
safety of female workers was at risk, the ETF stepped in, joining
with the Board of Investment (BOI) to increase the quality and
quantity of accommodation. This, too, was in line with welfare of
workers.

7.In another exercise, when statistics revealed that the

percentage of low birth weight babies in Sri Lanka was high
compared with other South Asian nations, perhaps because of a
higher percentage of workingfemales, the ETF stepped in and in
consultation with Sri Lankasnutritionists initiated a programme of
advice to Employers and Employees. Research carried out in India
has proved that a healthier workforce will be more productive, will

make lesser errors, and will be less prone to accidents.

Therefore,through such interventions,ETF could play a significant
role in enhancing the competitiveness rankings of Sri Lanka.
There are moves currently to amalgamate the ETF and the EPF. I
hope the policy makers would not lose sight of the useful objects
of ETF and would formulate two funds to be managed by one
body and continue the programmes that would benefit employees
during their working life and continue to promote those
techniques which would provide a safer workplace and create
healthier workers.
(Sunil G. Wijesinha was a former Chairman of the
Employees Trust Fund Board during the period 1989 to
1994. He subsequently served on the Board of Directors
on three other occasions. He is a Chartered Engineer, a
Chartered Management Accountant, and a qualified
Productivity practitioner. Currently he serves as a
Management Consultant and is the Chairman of listed and
unlisted companies. He was a former Chairman of NDB
Bank and a former Deputy Chairman of Sampath Bank,
and held the posts of Chairman of the Employers
Federation of Ceylon and President of the National
Chamber of Commerce of Sri Lanka.)
Posted by Thavam